The Equation The High Price of Securing the Blockchain

The decentralized nature of blockchains—the technology behind cryptocurrencies—is a big part of their appeal: There is no central authority, there are no intermediaries, and all participants contribute in maintaining the system. But as Chicago Booth’s Eric Budish argues, blockchains rely on continuous financial incentives paid to providers of what he calls “trust support”—be that doing computational work in the Bitcoin system or locking up cryptocurrency as collateral in the Ethereum system. The arrangement is akin to paying security guards to protect a bank because of a lack of police or enforceable laws to deter robbers.

Budish’s model demonstrates that to keep a growing blockchain trustworthy, the rewards paid for trust support must grow, too, and always outweigh what an attacker could gain. For example, if the value an attacker could steal increases a thousandfold, the cost of that trust support must also increase a thousandfold to keep the system secure—making blockchains expensive to operate and difficult to scale. To learn more about why blockchain security matters, read “In Stablecoins We Trust?”